No. 1 — January 7, 2000

 

Weekly Review

CABINET CRAFTS RECORD-SETTING BUDGET FOR FY 2000
--- by Jon Choy

Calling it the last push to put the economy back on track, the cabinet of Prime Minister Keizo Obuchi approved the largest-ever initial general account spending plan December 24. At just under ¥85 trillion ($708.3 billion at ¥120=$1.00), the fiscal blueprint for the year beginning April 1, 2000 is 3.8 percent larger than the original one for the current fiscal year. According to insiders, it will ensure that the economy reaches the government's target of 1 percent real growth in the 12 months ending March 31, 2001 (see previous article). Private-sector analysts generally agree that the new budget will help keep the economy expanding, but they also say that Tokyo still is not spending its money in ways that will encourage long-term prosperity. Moreover, worries are growing about the consequences of the government's current and recent spending sprees over the medium to long term.

Although not as large as the 5.4 percent increase recorded in the initial general account budget for FY 1999, the proposed 3.8 percent hike for FY 2000 is viewed as a strong statement of government support for a stimulative fiscal policy. However, when nondiscretionary items — national debt service costs and revenue transfers to local governments — are subtracted, the initial FY 2000 budget is less impressive. At 2.6 percent, the gain in discretionary spending is only half that of the current fiscal year (see Table 1). The smaller rise in the total budget, coupled with the strong growth of nondiscretionary spending, underlies the difference between discretionary outlays in the two fiscal years.
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Table 1: General Account Spending (Initial), FY 1996-FY 2000

(in billions of yen and percent change)

FY 1996

FY 1997

FY 1998

FY 1999

FY 2000

Total Expenditures

¥75,104.9

¥77,390.0

¥77,669.2

¥81,860.1

¥84,987.1

5.8%

3.0%

0.4%

5.4%

3.8%

Minus

Debt Service and Transfers to Local Governments

29,979.0

32,283.3

33,133.0

34,972.3*

36,895.6

13.4%

7.7%

2.6%

5.6%

5.5%

Equals

Discretionary Spending

45,125.9

45,106.7

44,536.2

46,887.8

48,091.4

1.3%

-0.0%

-1.3%

5.3%

2.6%

*Includes funds to cover carryover deficit from FY 1997. Exclusive of these funds, the total for nondiscretionary items would be ¥33,354.9 billion and the change 0.7 percent.

Source: Ministry of Finance

Mr. Obuchi and his cabinet penciled in the following spending initiatives for FY 2000 (see Table 2):

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Table 2: Summary of Initial General Account Outlays,
FY 1999-FY 2000

(in billions of yen)

Initial
FY 1999

Change

Initial
FY 1999

Change

Discretionary Items

Social Services

¥16,112.3

8.6%

¥16,766.6

4.1%

Education and Science

6,463.2

1.9

6,522.2

0.9

Pensions

1,478.3

-3.4

1,425.6

-3.6

Defense

4,932.2

-0.2

4,935.8

0.1

Economic Cooperation

987.7

0.8

984.2

-0.4

Public Works

9,430.7

5.0

9,430.7

0.0

Special Targeted Spending Brackets

500.0

n.a.

500.0

0.0

Small Business Measures

192.3

3.5

194.3

1.0

Food Control Programs

268.7

-0.1

223.9

-16.7

Energy Measures

653.1

-2.3

635.1

-2.8

Administration and Operations

5,359.6

1.5

5,963.4

11.3

Transfer to Industrial Investment Special Account

159.5

0.0

159.5

0.0

Reserves

350.0

0.0

350.0

0.0

aaa Subtotal

46,887.8

5.3

48,091.3

2.6

Nondiscretionary Items

Tax Transfers to Local Governments

12,883.1

-18.8

14,016.3

8.8

Other Transfers to Local Governments

639.9

n.a.

914.0

42.8

Debt Service

19,831.9

14.9

21,965.3

10.8

aaa Subtotal

33,354.9

0.7

36,895.6

10.6

Funds to Cover FY 1997 Carryover Deficit

1,617.4

n.a.

0.0

-100.0

Total

81,860.1

5.4

84,987.1

3.8

Source: Ministry of Finance

The FY 2000 budget compilation process produced some obvious losers. Agricultural programs will suffer a 16.7 percent cut under the initial spending plan, while energy projects face a 2.8 percent drop. Pension costs are expected to fall 3.6 percent as the population of World War II veterans and their families continues to decline.

Funding for official development assistance, which is broader than the economic cooperation category shown in Table 2, was the subject of extensive last-minute negotiations. The Ministry of Finance's draft FY 2000 budget included a 0.5 percent reduction from FY 1999's initial level, but this cutback was eased to a 0.2 percent drop in the cabinet-approved version.

While money for foreign aid will be tighter overall, more resources will be available for certain initiatives, including extra funding for nongovernmental organizations in war-torn countries (¥500 million or $4.2 million), clean energy projects (¥1.8 billion or $15 million), the environment and social development (¥12 billion or $100 million), child-welfare programs (¥800 million or $6.7 million), land-mine clearing (¥500 million or $4.2 million) and afforestation (¥400 million or $3.3 million). Ministry of Foreign Affairs officials note that the slight drop in total ODA money will be more than offset by the yen's 14 percent appreciation against the dollar since the initial budget for FY 1999 was compiled. Spokespeople add that the ministry will focus in the coming fiscal year on boosting the efficiency of Japan's foreign aid program and on funneling more money into humanitarian aid.

In another key development, defense spending, after being hit by declines in both FY 1998 and FY 1999, will edge up 0.1 percent to just over ¥4.9 trillion ($40.8 billion). Personnel-related costs are projected to rise by ¥36 billion ($300 million) to ¥2.2 trillion-plus ($18.3 billion), due mainly to an expected surge in retirements. Outlays to implement the decisions of the U.S.-Japan Special Action Committee on Okinawa will top ¥14 billion ($116.7 million), a gain of 15.6 percent. One line item that has been cut is Japan's financing for U.S. forces based on Japanese soil, a change reluctantly approved by Washington. Host-nation support will fall 2.8 percent to ¥260.3 billion ($2.2 billion) as a result of Tokyo's cancellation of some base-improvement projects. On the plus side, the Obuchi cabinet added ¥2 billion ($16.7 million) as Japan's FY 2000 share of the cost of developing a theater missile defense system with the United States.

MOF Budget Bureau specialists expect tax and stamp revenues to rise 3.3 percent in FY 2000 as the economic recovery takes hold (see Table 3). However, government borrowing will grow another 5 percent, they estimate. New issues of construction bonds are likely to drop slightly, but general borrowing could jump again. The overall increase in the sale of new bonds will bring the initial FY 2000 budget's dependence on borrowing to a record 38.4 percent.
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Table 3: Summary of Initial General Account Revenue Estimates,
FY 1999-FY 2000

(in billions of yen)

Initial
FY 1999

Change

Initial
FY 2000

Change

Tax and Stamp Receipts

¥47,119.0

-19.5%

¥48,659.0

3.3%

Nontax Receipts

3,691.1

2.8

3,718.1

0.7

Bonds

31,050.0

99.6

32,610.0

5.0

aaa Construction

9,340.0

10.8

9,150.0

-2.0

aaa General Revenue

21,710.0

204.5

23,460.0

8.1

Total

81,860.1

5.4

84,987.1

3.8

Source: Ministry of Finance

Tokyo's continued deficit spending has raised warning flags among Japanese and foreign observers alike. The Finance Ministry calculates that by the end of FY 2000, the central government's outstanding debt will top ¥364 trillion ($3 trillion), while local government debt will total ¥283 trillion ($2.4 trillion). Together, central and local authorities will owe ¥647 trillion ($5.4 trillion), or more than 130 percent of Japan's gross domestic product — the highest such level among Group of Seven nations.

Economists are hotly debating the impact of this mountain of debt at the same time that they weigh the possible consequences of the initial FY 2000 spending plan. Some praise the Obuchi cabinet's Millennium Projects initiative as indicative of how things are changing. The government earmarked ¥11.9 billion ($99.2 million) to bring high technology into Japan's classrooms, ¥15.2 billion ($126.7 million) to promote information technologies and ¥64 billion ($533.3 million) to decode the genetic blueprints of humans and rice plants. Critics say, however, that these exemplary projects represent only a tiny slice of the public works pie. They point to the 11 percent increase to ¥35.2 billion ($293.3 million) that Tokyo wants to put into building new Shinkansen (bullet train) lines as evidence of continued wasteful, pork-barrel spending.

The debate over the fate of the Fiscal Investment and Loan Program, the government's second capital budget, also is fast and furious. In preparation for a complete overhaul of the FILP in FY 2001, the Finance Ministry had proposed an 18.7 percent reduction in spending to just under ¥43 trillion ($358.3 billion). The cabinet was only slightly less harsh (see Table 4), deciding on a 17.4 percent cut to ¥43.7 trillion ($364.2 billion). While such areas as social welfare, land conservation, agriculture, roads and education will receive hikes of anywhere from 1 percent to 5.1 percent, funding for other categories will be slashed, including regional development, technology and economic cooperation.
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Table 4: Initial Fiscal Investment and Loan Program Outlays and Revenues,
FY 1999-FY 2000

(in billions of yen)

Initial FY 1999

Initial FY 1999

Amount

Change

Amount

Change

Outlays

Housing

¥12,886.1

-1.1%

¥12,761.9

-1.0%

Other Social Infrastructure

6,742.5

3.7

6,652.6

-1.3

Social Welfare

1,488.8

1.7

1,564.2

5.1

Education

840.2

11.5

848.4

1.0

Small Business

6,324.2

2.9

6,271.9

-0.8

Agriculture, Forestry and Fisheries

849.7

-2.0

880.7

3.6

Land Conservation and Disaster Reconstruction

666.3

20.8

700.1

5.1

Roads

3,397.9

2.7

3,478.2

2.4

Transportation and Communications

734.7

28.0

692.5

-5.7

Regional Development

1,361.8

30.1

1,093.3

-19.7

Industry and Technology

1,400.5

57.7

683.1

-51.2

Trade Promotion and Economic Cooperation

2,656.5

76.0

1,839.1

-30.8

aaa Subtotal

39,349.2

7.3

37,466.0

-4.8

Public Funds Management

13,550.0

1.9

6,210.0

-54.2

Total

52,899.2

5.9

43,676.0

-17.4

Revenues



Industrial Investment Special Account

103.6

63.1

110.0

6.2

Trust Fund Bureau Fund

43,715.6

-9.1

33,304.9

-23.8

Postal Life Insurance Fund

6,580.0

-7.3

6,380.0

-3.0

Government-Guaranteed Bonds and Borrowings

2,500.0

0.0

3,881.1

55.2

Total

52,899.2

-8.4

43,676.0

-17.4

Source: Ministry of Finance

Two items — one visible, the other not — are harbingers of the FILP's ultimate fate. Readily apparent is the fact that public funds management will be off 54.2 percent from FY 1999's mark. This indicates that the FILP's role as an investor of trust and pension funds controlled by the government will shrink quickly. Backing up this interpretation is the fact that in FY 2000, for the first time since it was created, the FILP will not receive any money from the postal savings system.

The postal savings system, which is run by the Ministry of Posts and Telecommunications, was counted on to contribute ¥11.5 trillion ($95.8 billion) to the initial FY 1999 FILP, an amount hidden within the total of funds drawn from the Trust Fund Bureau. While the bureau's employee and national pension funds will continue to lend money to the FILP in FY 2000, the size of this transfer will shrink. Government-administered or controlled pension plans are scheduled to put ¥4.3 trillion ($35.8 billion) into the FILP's coffers in FY 1999, but they will shift only ¥2.7 trillion ($22.5 billion) in FY 2000. Other Trust Fund Bureau programs will divert more money to the FILP in FY 2000 than this fiscal year — a projected ¥30.6 trillion ($255 billion) versus an estimated ¥27.9 trillion ($232.5 billion) — but the increase will not offset the other two reductions. Overall, the Trust Fund Bureau is expected to allocate ¥10.4 trillion ($86.7 billion) less to the FILP in FY 2000.

The Obuchi cabinet's FY 2000 initial general account budget likely will keep the economy plugging along through 2000 and into 2001. What it will not do, say critics who charge that it was crafted with the upcoming elections for the lower house of the Diet in mind, is encourage businesses and bureaucrats to adapt to the economic challenges facing Japan.

The views expressed in this report are those of the author
and do not necessarily represent those of the Japan Economic Institute

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